Fast Food to Child Care:
Financing the Road to the American Dream
(This article appeared in the October 2001 edition of Franchising World)
By Penn Ritter
November 20, 2001 - When Sekar Chettiar, and his brother Ramesh T. Chettiar, needed funds to purchase a franchise for a Domino's Pizza outlet in Hamden, Conn., they turned to a SBA non-bank lender to get the $150,000 required.
When Ramon and Hillary Martinez, a husband and wife team with prior experience in education, decided to purchase a franchise to open a Tutor Time educational-based child care learning center in Miller Place, Long Island, N.Y., they bypassed local banks and received $140,000 financing in just three weeks time through my company, Business Lenders, LLC, a non-bank lender.
Rameshbai, Anil, and Babubhai Patel decided to put their heads, their finances and their baking skills together to open a Manhattan Bagel Company outlet in Stoughton, Mass., and also sought our help to claim their pieces of the much publicized American Dream. Today, with the needed infusion of $80,000 cash, the Patels bought into Manhattan Bagel, benefited from the company's merger with New World Coffee, and now own one of the chain's 350 franchised stores which offer coffee with bagels and cream cheese throughout the United States.
The common thread which runs through all of these businesses is that all are franchises, all are minority-owned, all are doing extremely well financially and all were steered to non-bank SBA lenders rather than to various types of business, commercial or savings banks.
As we are all aware, franchising is growing at a rapid pace. Financing for the rising tide of franchises is coming, not from banks, but from SBA non-bank lenders.
Why Not Banks
Unlike banks, most non-bank lenders concentrate solely on a borrower's loan. SBA non-bank lenders don't demand that use all their services in order to obtain a loan. SBA non-bank lenders don't cross sell. Where a business deposits its daily receipts or invests the company's retirement funds or hosts a checking account is not relevant to a borrower's eligibility for a SBA non-bank loan.
SBA non-bank lenders are interested in the individual borrower and the franchise, taking into account professional goals and character, training and hiring practices, positive trends in recent credit history, and the current and future health of the franchisee.
In addition, many banks can't use local capital to finance out-of-state businesses. Accordingly, a SBA non-bank lender can provide the level of loan needed, when it's needed and where it's needed. Business Lenders, a member of the Medallion Financial Group, New York, is among the largest non-bank SBA lenders in the nation and has made loans in 36 states.
Most importantly, SBA non-bank lenders often specialize in loans to start-ups in local and under-served communities - constituencies from which banks have been known to shy away. SBA welcomes these constituencies as well as other entrepreneurial borrowers.
Experience Counts
The Chettiar brothers know their business well. Sekar has worked for Dominos since 1982, was a Dominos manager until 1985 when he bought his first Dominos in neighboring Westerly, R.I., which he sold in 1990, later purchasing a pizza restaurant with his wife in R.I. and also working for another Dominos in the Washington, D.C. area. His brother Ramesh also worked for the Domino's Team in Washington for three years in the early 1990's.
For the new Domino's franchise near the Quinnipiac College campus in Hamden, Conn., the Chettiar brothers used the $150,000 to refinance credit card and bank debt, and $35,000 for working capital to increase the store's advertising campaign and cover closing costs.
When the Martinezes decided to open their Tutor Time franchise, Hillary Martinez, who had previously been a Tutor Time franchise owner/operator elsewhere on Long Island, decided to operate the Miller Place, N.Y., Learning Center on a day-to-day basis handling all administrative functions, while Mr. Martinez is assisting his wife on a part time basis, at the same time maintaining his current position as an instructor for a nearby small business school.
Tutor Time, founded in 1988, is the fourth largest for-profit childcare company in the United States. The franchised centers provide educational-based childcare services five days a week to children between the ages of six weeks to five years of age. At last count, the Learning Center network consisted of 132 franchised units and 68 company-owned units.
The Patels' Manhattan Bagel franchise in Stoughton, Mass., will be owned and operated on a full time basis by Anil Patel and Rameshbai Patel, with part time assistance from family member Babubhai Patel. Since 1996, both Rameshibai and Anil have been preparing the daily stock of baked goods offered by another franchise operation, with Rameshbai acting as store manager supervising daily operations. Babubhai Patel also operated a successful Manhattan Bagel franchise in Springfield, Mass.
Manhattan Bagel changed its name to New World Coffee-Manhattan Bagel, Inc. and grew to 350 stores nationwide.
Why Non-Bank Lenders are Franchise-Friendly
To coincide with varying goals of prospective franchisees and the purposes for which they need to borrow, SBA non-bank lenders offer loans of varying amounts and terms. Most will lend up to $1 million, with typical terms being 10 years for working capital, 15 years for useful life for equipment, 25 years for real estate, or a blended rate combining all three for multi-purpose loans and more flexible repayment forms. A blended rate for working capital, equipment and real estate is most unusual and helpful for the majority of borrowers.
Long-term SBA loans can offer low monthly payments, so borrowers needn't fear being strapped. Also, there are no balloons and no call provisions, and other than a small pre-payment fee for very early payment of long-term loans of more than 15 years, there are no other fees or penalties, allowing borrowers to remit more than their monthly payment to pay down their loan either a bit or a chunk at a time.
Non-bank SBA lenders who specialize in franchise lending are uniquely positioned to offer advice on two fronts. First, because they know the market, they are able to advise prospective franchisees on the balance sheet strength of particular franchisors, helping the prospect with considerations such as industry stability and franchisor reliability. Secondly, SBA non-bank lenders who specialize in franchise lending are able to guide each loan carefully.
